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Pricing Policy: Time CustomizationPowerPoint Presentation

Pricing Policy: Time Customization

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Pricing Policy: Time Customization. I. Economic and Behavioral Foundations of Pricing. II. Power Pricing Concepts. Outline. Time customization of prices: The short term Trial and accelerate purchase Potential demand buildup Peak and off-peak pricing

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Pricing Policy:Time Customization Foundations of Pricing

- I. Economic and Behavioral

- II. Power Pricing Concepts

Outline

- Time customization of prices: The short term
- Trial and accelerate purchase
- Potential demand buildup
- Peak and off-peak pricing
- Demand probing and yield management
- Potential negative consequences

- The long-term dynamic effects

Examples

- Campbell offered trade deals to retailers during summer (a eight-week period)
- Introductory offer on a new product
- Varying airfares over time
- Early bird specials
- Hotels’ winter specials

Basic Motivations

1. Trial

2. Purchase

Acceleration

Not Time

driven

Known

3. Potential Build-up

4. Peak Load

Time

driven

5. Peak Load withDemand Shift

Information

About Demand

6. Demand probing

Initially

Limited

7. Yield Management

1. Trial and 2. Purchase Acceleration

- On Saturday, 11/22, 1986, Ho Camera offered 5 rolls of Fuji film (24 exposures) at $15.98 less a $10 manufacturer’s mail-in rebate valid until 12/21, 1986.
- The offer highlighted Fuji’s $5.98 “Final Cost After Rebate” or $1.20 per roll – approximately 60% less than the regular price.
- The vast majority of consumers have been loyal to Kodak even though Consumer Reports citing virtually indistinguishable quality differences in their films.
- Two goals:
- To persuade consumers to switch and try Fuji
- To accelerate purchase and “load pantry”

1. Trial and 2. Purchase Acceleration

- Two other mechanisms for enacting price customization:
- Coupon
- On-shelf price cut

- These mechanisms differ in two important respects:
- Reference price
- Selectivity (areas, price-sensitive consumers, and Kodak consumers)

Coupon redemption

- A panel-level study of how shoppers redeem coupon when they purchase consumer packaged goods
- Regular users are more likely to redeem coupons than previous nonusers
- What is the motivation behind coupon offers?

Purchase Acceleration vs. Forward Buying

Shipments

Consumption

DEC

MAR

JUN

SEP

How do you resolve this problem?

EDLP versus HILO Stores

- An examination of 3,000 common SKUs across 5 supermarkets (2 EDLPs and 3 HILO stores) (Ho, Tang, Bell, Management Science, 1998)
- HILO stores have a higher price variance and a higher expected price
- EDLP versus HILO stores
- Number of trips
- Average spending per trip

Mean and Standard Deviation of Basket Prices

Tang, Bell, and Ho (California Management Review, 2002)

$60

$40

Time

1

4

5

6

2

3

3. Potential Buildup of Low-WTP Customers- Mr. Coffee coffee maker (unit variable cost = $32)
- The goal is to charge maximum WTP of a growing proportion of the market that would buy at regular price
- Suppose customers for a coffee maker are of two types, one valuing the product at $60 and the other at $40.
- Each group has a “birth” rate of 100 per month

3. Potential Buildup of Low-WTP Customers

Unit Variable Cost = $32

4. Peak and Off-PeakLoad Pricing

Peak

Sales

Volume

Sales

Volume

Off-Peak

100

75

50

37.5

$100

$50

$75

$50

$100

$150

5. Peak Load with Demand Shifts

- If we charge $600 for both day flight and redeye, we receive $120,000 (leading to zero demand for redeye)
- If we charge $1000 for day flight and $400 for redeye, we receive $140,000 (shifting the students’ demand to the redeye)

Uncertain Demand

- Consider selling a product to a single customer and three scenarios on information about a potential customer’s valuation of a product
- You know she values the product at $5
- You know she values it somewhere between $4.00 and $6.00
- You know she values it somewhere between $0 and 10.00 (each value is equally likely)

- Note the customer’s expected valuation is $5.00

Optimal Two-day Sale Pricing

Unit variable cost =0

1.0

1.0

Prob.

of a Sale

X

Prob.

of a Sale

Y

$10

$10

$5

$3.33

Day 2

$6.67

Day 1

Charge $6.67 in Day 1 and $3.33 in Day 2

Expected Revenue = 1/3 (6.67) + 1/3 (3.33)

7. Yield Management

- American Airlines pioneered the concept in the late 1970s
- Leisure: Book well in advance, price oriented, and flexible on schedule
- Business: Book on short notice, less price sensitive, and inflexible on schedule
- Yield management system is to price and manage the availability of specific fare types over time as demand for a particular flight reveals itself
- If bookings are above the norm, this is a signal to shut off availability of highly discounted fares

transaction

data

Reservation

System

availability

display

YM System

- forecasting

- allocation

implemented

allocations

Point of sale

forecasts

recommended allocations

bid price

YM Analyst

- limited domain (O-D pair)

- revenue performance incentive

Airline YM OperationsBasic Ideas: Chicago SFO

- Based on initial forecasts, start with initial allocations (number of seats) for the two fare classes.
- Adjust the allocations based on demand realizations.
- For example, if the demand for Full Coach looks promising, “close” the allocation for Discount.
- If later the demand is lower than expected, move allocations to Discount again.

Examples: What motivations?

- Campbell offered trade deals to retailers during summer (a eight-week period)
- Introductory offer on a new product
- Varying airfares over time
- Early bird specials
- Hotels’ winter specials

Potential Negative Consequences

- Incremental or substitute sale (e.g., negligible increase in consumption)
- Cost of customization (e.g., production and inventory costs)
- System effect
- Reference price effect
- Wait for sale mentality
- Fairness

Long Term Dynamic Effects

Current

Period Price

Price Response Curve

Competitive

Situation

Current

Sales Volume

Current

Contribution

Current

Cost

Future Price

Response Curve

and Price/Profit

Realization

Future Cost

Position

Punch-line

- Clearly understand the underlying motivation
- Design the time-customization plan based on the motivation
- Consider the potential negative consequences and long-term dynamic effects

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